140 Years of Financial Crises: Old Dog, New Tricks

Looking at 140 years of modern financial history, this paper analyses what is new and what is old about the 2008/09 financial crisis. I identify a number of traits common to most financial crises in 19th and 20th century economic history. First, systemic banking crises are typically credit booms gone bust, i.e. they are preceded by periods of marked expansions of the balance sheets of financial intermediaries. Second, despite much more active central bank policies, financial crises have remained costly for the real economy. Third, increases of public debt in the aftermath of banking crisis are nothing new, but there are some indications that the costs have increased over time. However, this time was also different in three respects: first, the dependence of the financial system on wholesale funding markets is a historically new phenomenon with major implications for financial stability and monetary policy. Second, the crisis was closely linked to the emergence of global imbalances and unprecedented reserve accumulation. Third, the global credit boom since the late 1970s did not feed into higher investment rates, which raises questions about the economic benefits of the strong increase in financial intensity in recent years.